Case Studies

Robert Jones, Esq.
100 Taylor Street
Boston, MA 02134

Re:Samuel Smith – Appeal
Under the X Corporation LTD Plan for Employees

Dear Mr. Abney:

This letter is a decision on the final claims appeal of Mr. Smith by Claim Appeal Fiduciary Services, Inc. (“CAFS”) the designated independent claims appeal fiduciary for the X Corporation LTD Plan for Employees (the “LTD Plan”). CAFS has had the opportunity to review and consider Mr. Smith’s final Appeal for benefits under the LTD Plan. For the reasons stated in this letter, CAFS must deny Mr. Smith’s Appeal for benefits under the Plan.

Specific Reasons for Determination and Reference to Plan Provisions

Factual Background and Claim History – The Administrative Record regarding Mr. Smith’s claim indicates that Mr. Smith was employed as an electrical sales engineer for X’s Machine department. Mr. Smith’s first day of disability was January 1, 2000. He applied for and received benefits under the LTD Plan through August 30, 2002.

After a review of the Administrative Record, the Claim’s Examiner at AA Services, the LTD Plan’s third-party administrator, determined that Mr. Smith was engaging in an occupation or performing work for compensation or profit and was, therefore, ineligible for disability payments under the LTD Plan. He was informed by a letter dated September 26, 2002 of the denial of his benefits retroactive to July 1, 2001. Copy of the LTD Plan document accompanied that letter. At that time, AA Services also advised Mr. Smith that he had been overpaid for the period July 1, 2001 through August 30, 2002.

By a letter dated January 22, 2003, as Mr. Smith’s attorney, you informed the AA Services that you represented Mr. Smith and that your letter represented an Appeal of the denial benefits under the LTD Plan. You advised AA Services that the income received by Mr. Smith was “passive” and asserted that as such, he was not performing work as defined by the LTD Plan.

In a letter to you dated January 29, 2003, AA Services acknowledged the Appeal and asked for you to forward any pertinent additional information to support the claim for disability. On February 13, 2003, you were contacted by telephone by AA Services to request Mr. Smith’s individual and corporate tax returns for 1999, 2000 and 2001. You were advised that Mr. Smith’s physical condition was not at issue. Rather, the defect was the fact that he is employed in some capacity and earning income impacting coverage under the LTD Plan. You agreed to submit the requested documents within two (2) weeks. Following that two (2) week period, you were contacted again by AA Services and informed that no documents had been received. Due to the time that had elapsed, you were advised that a decision would be forthcoming. In a letter dated February 26, 2003, AA Services advised you that the prior determination to deny Mr. Smith continuing benefits was upheld. Pertinent provisions from the Plan document were provided in that letter along with the LTD Plan appeal procedures.

In a letter dated March 21, 2003, you sent a final Appeal to AA Services and X Corporation. In your letter, you advised that Mr. Smith’s income is derived from investments, again in support of your assertion that Mr. Smith’s income is passive. No additional information was provided. The previously requested tax return information was not provided.

In response, on April 2, 2003, CAFS wrote to you to identify itself as the independent claim appeal fiduciary for the LTD Plan. CAFS acknowledged receipt of the Appeal and again noted that no additional information had been provided to support Mr. Smith’s claim for continued disability benefits under the terms of the LTD Plan. By a letter dated April 16, 2003, you requested of CAFS additional time to provide the tax return information. You were granted a twenty-five (25) day extension, to May 10, 2003, to provide that documentation.

On May 23, 2003, thirteen (13) days after the required deadline, you provided unsigned copies of Mr. Smith’s 2001 and 2002 federal tax returns. On July 10, 2003, CAFS, in its capacity as the LTD Plan’s independent claim appeal fiduciary, acknowledged receipt of the income tax information and requested copies of W-2 Forms related to such tax returns, copy of the signature pages for the tax returns and a description of an entity called AB, LLC. On August 11, 2003, you sent to CAFS a copy of the signature pages for the tax returns and the W-2 Tax Forms. No information on AB, LLC was provided at that time.

In accordance with the Appeal’s procedure of the Plan, the time period for making benefit determinations on the review of your Appeal was tolled pending receipt of information from you (on Mr. Smith’s behalf). Information on the Baron Partners, LLC has not been provided and a reasonable period of time has elapsed since CAFS’s request. Therefore, this Appeal response is now being rendered without the additional information requested on Baron Partners, LLC. Other information on that entity is already stated in the tax returns. CAFS as the LTD Plans independent claim appeal fiduciary has reviewed the entire administrative record of Mr. Smith’s appeal.

Plan Provisions Supporting the Denial of Benefits

Pursuant to the LTD Plan, a covered disability is defined as follows:

Covered Disability:

You will be considered to have a covered disability…under the Plan if:

During the first 24 months of such disability, inclusive of any period of short term disability, you are totally and continuously unable to perform the essential duties of your employment with the Company, or the duties of any other suitable alternative position with the Company; and

During the continuation of such total disability following the first 24 months, you are totally and continuously unable to engage in any occupation or perform any work for compensation or profit for which you are, or may become, reasonably well fitted by reason of education, training or experience – at X Corporation or elsewhere. Page 10, LTD Plan Summary Plan Description (“LTD SPD”).

Discretionary Authority:

The LTD Plan grants X complete discretionary authority regarding the interpretation of the LTD Plan as follows:

The Plan Administrator or its designee shall have discretionary authority to determine eligibility for benefits and to construe any and all terms of the Plan, including, but not limited to, any disputed or doubtful terms. The Plan Administrator or its designee shall also have the power and discretion to determine all questions of fact and law arising in connection with the administration, interpretation and application of the Plan. Any and all determinations by the Plan Administrator or its designee shall be conclusive and binding on all persons… Page 13, LTD SPD.

Plan Administrator:

Pursuant to the LTD Plan, X is the “Plan Administrator” and CAFS is an independent entity asked to perform a fresh look fiduciary analysis of Mr. Smith’s claim as X’s designee. You were notified of this fact. Page 25, LTD SPD.

Reasons for Denial and Application of the Plan

The information obtained on Mr. Smith’s disability claim has been compiled and assembled into an Administrative Record. All of the information contained within that Record has been reviewed and considered by CAFS, the independent fiduciary for this claim appeal. CAFS has no conflict of interest in this matter and will not suffer any negative repercussion whether it approves or denies claims Mr. Smith’s under the LTD Plan and X Corporation has agreed to abide by CAFS’ final appeal decision.

The LTD Plan has a two (2) tiered structure. Under the first tier, Mr. Smith is eligible to receive disability benefits, if during the first twenty-four (24) months of such disability, inclusive of any period of short term disability, he is totally and continuously unable to perform the essential duties of his regular position with X Corporation. He received long term disability benefits for this period based on his condition.

A second tier of benefits follows the first twenty-four (24) month period. In this second tier of benefits, Mr. Smith must substantiate that he is “totally and continuously unable to engage in any occupation or perform any work for compensation or profit for which [he] is or may become reasonably well fitted by reason of education training or experience – at X Corporation or elsewhere.” As AA Services identified in its correspondence dated December 26, 2002, the record of the Social Security Administration in connection with the denial of Mr. Smith’s claim for social security disability benefits, shows that Mr. Smith stated that he worked at Smith’s Diner (the “Diner”) at 111 East First Street,Boston, MA. Mr. Smith stated that the Diner is his business and that he is in charge of all financial decisions. Mr. Smith further stated that the Diner has twelve (12) employees and that he worked two (2) or three (3) days per week, eight (8) hours per day. Based on these statements, the Social Security Administration denied his benefits.

Based on these statements, AA Services reasonably requested copies of Mr. Smith’s individual and corporate tax returns for 1999, 2000 and 2001. Unsigned copies of the 2000 and 2001 personal income tax returns were received by AA Services. Subsequent to that, the signature pages from the tax returns along with W-2 Forms were received. Your position, as stated in your letters dated January 22, 2003 and March 21, 2003 is that Mr. Smith’s income is derived from passive sources and, therefore, Mr. Smith is not engaged in any occupation or performing any work for compensation or profit under the terms of the LTD Plan. The tax documentation received contradicts your assertion

Mr. Smith’s income tax returns for 2001 and 2002 state clearly and consistently that Mr. Smith has income derived from non-passive sources. The tax documentation demonstrates that Mr. Smith is engaging in activities for which he receives remuneration for services as an employee, and that he materially participates in a limited liability company. Specific facts from the tax information includes the following:

1. Mr. Smith signs the tax return indicating his occupation as a “Manager.”
   
   
2. W-2 Forms are issued from the Diner indicating that Mr. Smith receives wages. The W-2 Form is not a form used to indicate a passive investment. Rather, the W-2 Form specifically is issued by an employer engaged in a trade or business who pays for remuneration for services performed by an employee. Accordingly, the tax information indicates that Mr. Smith is providing services to the Diner for which he receives remuneration.
   
   
3. Consistent with his position as an employee of the Diner, Mr. Smith also deducted employee business expenses on Form 2106. Again listing his occupation as a Manager, he deducted employee-related business expenses for travel in excess of $13,000 in both 2001 and 2002. This fact contradicts his disability status as well.
   
   
4. Schedule E to Form 1040 indicates a non-passive loss of $34,897 from an entity called Baron Partners, LLC. This is consistent with the Schedule SE form filed for self-employment. In order for Mr. Smith to incur the non-passive loss, he must materially participate in the activity. This means he must engage in work activities for this venture. Otherwise, he may only offset a passive loss against passive gain. Accordingly, the position taken on his tax return relative to Baron Partners, LLC indicates that he materially participates in this entity and, therefore, is allowed to take a non-passive loss as a result of his activities.

The overwhelming weight of evidence, in the documentation provided by Mr. Smith, indicates that he is materially participating and actively working in various capacities with at least two (2) different entities. As a result of the information which indicates that he is engaged in some occupation or performing some work for compensation or profit, he does not have a Covered Disability under the second tier of the LTD Plan.

As an independent fiduciary and designee of the Plan Administrator, CAFS has full discretion to determine eligibility for benefits and to interpret the terms of the LTD Plan. Based on the tax information which indicates non-passive activities as an employee receiving remuneration for services for the Diner and considering his participation in the activities of Baron Partners, LLC, Mr. Smith does not have a Covered Disability under the LTD Plan and his final Appeal for benefits under the LTD Plan is denied.

Overpayments

According to the Administrative Record, Mr. Smith received disability payments from July 2001 through September 2002 which have been overpaid as a result of the fact that he did not maintain a covered disability under the second tier of benefits of the LTD Plan. Under cover of a separate letter to your office from AA Services, you will be advised of the amount of the overpayment and a request for reimbursement will be tendered to you on behalf of Mr. Smith.

Additional Information

Pursuant to X’s Benefit Determination and Claims Appeal Procedure for the Plan, this final review has been a “fresh” look by CAFS, without deference to any prior denial decision. In addition, the final review was conducted by CAFS, which was not involved in the prior denial decision, and is not a subordinate of the prior decision maker.

Mr. Smith is entitled to receive, upon written request and free of charge, any documents, records and other information that he has not yet received and that were relied upon in making this benefit determination, or that were submitted, considered or generated in the course of making his benefit determination, or that demonstrate compliance with the Plan claims processing administrative procedure.

This is the last and final review of Mr. Smith’s claim for LTD benefits. Mr. Smith has the right to continue to pursue his civil action under Section 502 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), 29 U.S.C. §1132. A civil action must be brought within one (1) year from the date of this letter. The review of this claim applied the LTD SPD Plan terms, and facts in the Administrative Record of this claim. Other than the documents referred to in this letter, no other internal rule, guideline, protocol or other similar criterion was relied upon in making this determination.

Very truly yours,

Claim Appeal Fiduciary Services, Inc.

By___________________________

Jeffrey D. Zimon, President